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deMarket Development: In December, the MSCI World Index (total returns in USD) declined 4.25%, the EURO STOXX 50 (net returns in EUR) came down 3.74%, whilst the S&P 500 (total return) also ended the month in the red, returning -5.76%. The Dollar Index (DXY Index) lost 2.30%, whilst the generic 30Yr Treasury yield increased from 3.74% to 3.96 and the VIX came up slightly, from 20.6 to 21.7.
December closed a difficult year in the same way that it started, with bearish market action again dominating headlines. Investors remain concerned by the signalling from the Federal Reserve and the ECB, that interest rates have to rise further, as both institutions look to ensure the inflation dynamics durably abate by setting in stone positive real interest rates.
While the CPI continues to show signs of having peaked, and the fixed-income market is taking ample notice by starkly inverting the US yield curve and weakening the US Dollar; Central Banks, having underestimated inflationary dynamics once, seem resolute in not relaxing too early.
As discussed in our past commentaries, the implications remain negative for the highly valued segments of the markets – a segment which still exists, even after significant drawdowns – especially as those companies grapple with a slower investment cycle brought about by recession fears.
On the other side of the Pacific, the Bank of Japan continued to adjust its monetary policy, adding further upward pressure to the Yen and longer-term rates. In China, the reopening of the economy sparked a significant and welcome rally in asset prices during the month, exhibiting the valuation compression this policy had engendered.
Market Outlook
This past year has been challenging for the traditional 60/40 portfolio, given the repricing of all asset classes on the steepest interest rate hike cycle in recent history. While questions remain on the macroeconomic fundamentals for the coming year, we believe the situation is stabilising and supporting, if not a bull market, at least a more steady backdrop – the recipe for mild yet positive returns in the near term.
As mentioned last year, prospective returns are now improved for our balanced style of management given reinforced risk premia across the spectrum of financial assets, higher overall rates, and acceptable valuations in certain areas of the equity market.
Portfolio Development
The Sturdza Family Fund‘s NAV decreased by 2.16% during the month, reflective of the above-mentioned volatility during December.
In terms of equity contribution, Teleperformance led the way (+8bps), followed by Alibaba (+5bps), Schlumberger (+4bps), Coopers (+4bps) and Boston Scientific (+3bps).
On the detractors’ side, the bottom performers were Worldline (-27bps), Alphabet (14bps), Constellation Brands (-13bps), Centene (-12bps) and Amazon (-12bps).
As discussed last month, Teleperformance’s correction in November was sparked by allegations of employee mistreatment at its Columbian office, in stark contrast to its hitherto pristine ESG credentials. In light of the company’s reassuring and transparent communication, we seized the opportunity to increase the position.
The position’s leading contribution in December supports the view that other investors have decided to continue placing their trust in the company, and believe that the current valuation, growth and quality of the underlying company warrant us to maintain this position going forward.
The Fund also continues to feel confident in its hybrid corporate portfolio, initiated in October during a time of dislocation. As was seen in December, many leading hybrid borrowers have shown the appetite and discipline to call these instruments on schedule, or even accelerate their replacement via tender offers, assuaging fears of a change in mentality, sparked by a few overleveraged and opportunistic actors in H2 2022.
While the credit rally paused in December, hybrids were a small net contributor to the Fund overall and broadly held their levels, implying high single-digit yield to calls going forward.
The put-selling strategy also continues to offer the Fund attractive deployment opportunities, given the high levels of implied volatility. While 2022 ended up only marginally net positive on the put selling strategy on strict P&L metrics, it nevertheless contrasts with all major asset classes which were down significantly, and also provided us with highly attractive entry points in great companies (e.g. Amazon) which are already generating significant economic upside at the time of writing. We remain disciplined in the sizing and choice of underlyings, while looking for a comfortable margin of safety, but believe the strategy should prove even more generative in 2023.
Finally, we initiated a position in Amadeus during the month, a steady and dominant business which should profit from a return of global travel on the back of China reopening. While the company should generally grow more slowly than it has in the past 10 years, its stability and moat, coupled with a fair valuation and upcoming catalysts, convinced us to initiate a small position.
In line with our outlook, the Fund remains active, looking for opportunities to upgrade the quality of the portfolio and focus on strong franchises offering growth, reasonable valuations and limited economic exposure.
As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact us for further information.
Adam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com
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The views and statements contained herein are those of Banque Eric Sturdza SA in their capacity as Investment Advisers to the Fund as of 18/01/2023 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.